Chapter 8

CHAPTER 8
DEBT SERVICE FUNDS

ANSWERS TO QUESTIONS
Question 8-1
GAAP identifies the purpose of Debt Service Funds as being to account for and report financial
resources that are restricted, committed, or assigned to expenditure for principal and interest
[on general long-term liabilities]. Only general government long-term liabilities (those being
repaid by governmental fund resources) are serviced through Debt Service Funds.
GAAP requires that a Debt Service Fund be used to account for debt service on general long-term
liabilities if either of the following is true:
(a) Use of Debt Service Fund is legally or contractually mandated
(b) Resources are being accumulated currently to be used for debt service
requirements in the future.
Use of a Debt Service Fund related to general long-term liabilities is never prohibited. A
government may want to use a Debt Service Fund for a serial bond issue, even if it is not required
to do so, in order to better manage and control its debt service by accounting for all debt service
in Debt Service Funds. In this manner all general government debt service would be financed and
accounted for through Debt Service Funds, not some through the General Fund or Special
Revenue Funds and some through Debt Service Funds. Too, transferring resources from the
General Fund or Special Revenue Funds to the Debt Service Funds avoids the possibility of
resources needed for debt service being used for other purposes. Finally, many tasksfrom
reconciling accounts with fiscal agents to auditing debt service transactionsare facilitated by
accounting for all general government debt service in Debt Service Funds.
Question 8-2
The main sources of assets for a Debt Service Fund typically are contributions from other funds,
taxes, and earnings on invested assets. Refunding bond proceeds usually are the main sources of
assets for a refunding Debt Service Fund.
Question 8-3
a.
Fixed rate debt issues bear the same interest rate from issuance to maturity, whereas the
interest rate of variable rate issues varies in accordance with some agreed indexsuch as a
certain bank's prime rate or a specified federal security interest rateduring the life of the
variable rate issue.
b.
Conventional serial and term bonds usually are issued to yield approximately their par (face)
amount, since interest is paid annually or semiannually, whereas deep discount bonds are
issued at substantially less than par (face) because both the principal and much, if not all, of
the accumulated compound interest for the life of the issue are paid at its maturity.
Question 8-4
2011 Pearson Education, Inc. publishing as Prentice Hall
183
Governments are permitted (but not required) to accrue unmatured interest (and principal) on
general long-term liabilities if two conditions are met. First, the interest payment must be due
within one month after the fiscal year-end. Second, the government must have sufficient
dedicated resources set aside in a Debt Service Fund to provide for making the payments when
they are due.
Question 8-5
Interest payable normally is recorded when due. Interest should not be accrued at the December
31 year end in the case described for Allen City because the payment is not due within a month
after year end. The reason is that taxes typically are levied for, or other resources provided to,
the Debt Service Fund in the year in which the interest payment comes due. To accrue the
interest expenditure and liability at the end of Year 1when the resources are to be provided to
the Debt Service Fund in Year 2would cause the Debt Service Fund to report an unwarranted
deficit. Too, the interest payable would not properly be classified as a fund liability at the end of
Year 1, since its payment in Year 2 will not require use of assets existing at the end of Year 1 but
will be financed by assets arising in Year 2.
Governments are permitted, but not required, to accrue unmatured principal and interest
payments due within the first month of the next fiscal year if dedicated resources are set aside in a
Debt Service Fund to provide for the payments when due. Therefore, if Allen Citys debt service
payment were due on January 15 of the second year and the city had set dedicated resources aside
in the Debt Service Fund by December 31, of the first year, Allen City would be permitted, but
not required, to accrue the amount of interest due on January 15.
Question 8-6
a.
A Governmental Unit might want to refund an outstanding term bond issue at maturity
because it has not accumulated sufficient assets in a Debt Service Fund to retire the term
bond issue. Individual maturities of serial bonds would rarely warrant refunding.
b.
A Governmental Unit might want to refund either a term bond or serial bond issue prior to
maturity because interest rates or other market conditions are more favorable now than (l)
when the bonds were issued or (2) they are expected to be in the future, e.g., when bonds
might need to be issued to refund a term bond issue at maturity. Such refundings may result
in an "economic gain." In addition, bonds outstanding may have highly restrictive (on the
government) provisions (covenants) in the bond indentures that would not be required by
investors in a new (refunding) bond issue. Thus, the government could relieve itself of such
restrictive bond covenant provisions through a refunding bond issue. Finally, a Governmental
Unit may refund bond issues prior to maturity to "restructure" or "rearrange" the amounts
and timing of future annual debt service requirements.
184
Question 8-7
a.
The appreciation in value of sinking fund securities should be recorded in the DSF accounts if
the investments are subject to the fair value accounting requirements of GASB Statement No.
31, discussed in Chapter 5.
b.
The answer is the same for securities that have declined in value.
Question 8-8
Formal budgetary control of Debt Service Funds is not ordinarily needed, unless required by law,
because:
1. the expenditures that must be financed are known precisely in advance in the case of fixed rate
serial debt;
2. the financing requirements of sinking funds for fixed rate term debt are likewise known in
advance; and
3. the revenue sources typically are few, such as property taxes and interest, with the additional
amounts needed coming from interfund transfers, which are subject to budgetary control in
the transferor (payer) funds.
Thus, DSF budgetary control accounts are not essential, unless required by law, except where
they serve useful management control purposes.
Question 8-9
"Defeasance" means that a debt is legally satisfied, and any related liens and indenture provisions
are released, without the debt having actually been retired.
Legal defeasance is accomplished by fulfilling the "defeasance" provisions of the bond indenture.
The specific in substance defeasance requirements of the related GASB standard must be met in
an in-substance defeasance. These requirements include
1. The debtor must irrevocably place sufficient cash or other assets with an escrow agent in a
trust in an amount that, along with interest earned, will provide for all future debt service
payments on the debt.
2. The sole use of the trust must be to satisfy scheduled principal and interest payments on the
debt.
3. The noncash assets are limited to monetary assets that are risk-free as to the amount, timing,
and collection of interest and principal and denominated in the same currency as the debt.
4. The maturities of the noncash monetary assets must match the scheduled maturities of
principal and interest on the debt.
185
Question 8-10
A refunding transaction occurs when new debt is issued, and the proceeds of the "new" debt issue
are used to repay previously outstanding ("old") debt. If the "old" debt is being repaid at its
maturity, the refunding transaction is referred to as a current refunding. If the "old" debt is not
due currently, in which case the old bonds are called or the proceeds of the new debt typically are
placed in escrow with a trustee or agent (that meet the GASB in substance defeasance
requirements) and used to make principal and interest payments in the future, the refunding
transaction is referred to as an advance refunding.
Question 8-11
Both bond principal and interest to be paid within the first month of the next year may be accrued
as expenditures and current liabilities of a Debt Service Fund if they are to be paid from assets
currently in the Debt Service Fund that are dedicated for that purpose. They should not be
accrued if they are not to be paid from dedicated assets in the fund at year end. Likewise, bond
principal and interest on general long-term liabilities that is due more than one month after year
end should not be accrued.
Question 8-12
The town of Sinking Creek has the option of accruing the interest and the principal due on
January 3, 20X5, if it wishes to do so. The town is not required to make the accrual. The town
meets the two conditions required in order to be permitted to accrue the debt service payment
i.e., dedicated resources have been accumulated in the DSF by the end of the fiscal year and the
payment is due within the first month of the next fiscal year. If the town opts to accrue the debt
service, it must accrue the full amount of the payment due on January 3, 20X5, and should accrue
the payment in subsequent years as well.
Question 8-13
Deep discount debt is primarily bonds and notes with a stated (face) interest rate equal to less
than 75% of the effective rate of interest. Zero coupon bonds are one of the better known
examples. Debt service expenditures on deep discount debt should be recognized in the period
that the payments mature (i.e., "when due"). Accrual is permitted only if the payment is due in
the first month of the next fiscal year and the payment is to be made from resources dedicated for
that purpose and set aside in a Debt Service Fund.
Question 8-14
The balance remaining in a Debt Service Fund after the bonds mature and are paid would be
disposed of in accordance with legal and contractual requirements. If permitted by the law and
bond indenture, the balance would ordinarily be transferred to another Debt Service Fund
though sometimes the balance may be transferred to the General Fund.
186
Question 8-15
The face value and any premium of a refunding bond issue are reported as other financing sources
in the statement of revenues, expenditures, and changes in fund balance. A discount, if any,
should be reported as an other financing use, and expenditures reported for any bond issue costs
on the refunding issue. The account title used for the source or use should indicate that the bonds
are refunding bonds (e.g., refunding bond and premium on refunding bonds). The payment to
retire or defease old debt should be reported as an other financing use to the extent that it is
financed from the net refunding bond proceeds. Payments in excess of the net refunding bond
proceeds are reported as expenditures.
SOLUTIONS TO EXERCISES
Exercise 8-1
1.
2.
3.
4.
5.
6.
7.
8.
e
a
c
c
f
d
a
d
Exercise 8-2
Debt Service Funds normally are used for Items 1, 3.
Items 2, 4, and 6 typically would be accounted for in the General Fund. Item 5 would be
accounted for in an Agency Fund as the government is acting solely as an intermediary between
the taxpayers and the bondholders. Item 7 should be accounted for in the Enterprise Fund, and
Item 8 should be accounted for in a Capital Projects Fund.
187
Exercise 8-3
A. Other Financing Use..................................................................... $13,000,000
B. Other Financing Use.....................................................................
Expenditure............................................................................
18,000,000
2,000,000
C.
Other Financing Use...............................................................

Expenditure............................................................................
16,000,000
2,000,000
D.
20,000,000
E.

Expenditure............................................................................
5,000,000
10,000,000
F.

Expenditure............................................................................
8,000,000
4,000,000
Exercise 8-4
1. Cash ........................................................................................50,000,000
Other Financing SourcesRefunding Bonds.........................
To record issuance of refunding bonds.
50,000,000
2. Cash ........................................................................................5,000,000
Other Financing SourcesTransfers In.................................
To record transfer from General Fund.
5,000,000
3. Other Financing UsesPayment to Refunded

Bond Escrow Agent................................................................
ExpendituresPayment to Refunded Bond
Escrow Agent....................................................................
Cash........................................................................................
To record payment to escrow agent to defease
bonds in substance.
50,000,000
188
5,000,000
55,000,000
Exercise 8-5
1. Cash .................................................................7,420,000
ExpendituresBond Issue Costs..........................................
Other Financing SourcesRefunding Bonds.................
Other Financing SourcesRefunding Bond
Premium.....................................................................
To record issuance of refunding bonds.
60,000
7,300,000
180,000
2. ExpendituresInterest*.......................................................
Other Financing UsesBond Principal
Retirement..................................................................
Cash................................................................................
To record retirement of refunding bonds.
420,000
7,000,000
7,420,000
Note that other financing uses are not reported for interest due that is financed with
borrowed resources. This creates new debt rather than substituting new debt for old debt.
Exercise 8-6
1. Cash................................................................................
RevenuesProperty Taxes......................................
To record levy and collection of property taxes.
$15,000,000
2. Investments.....................................................................
Cash.........................................................................
To record purchase of investments.
14,500,000
3. Cash................................................................................
Investments..............................................................
To record maturity of investments.
7,000,000
4. ExpendituresDebt ServicePrincipal.........................
ExpendituresDebt ServiceInterest...........................
Cash.........................................................................
To record payment of long-term debt principal and interest.
4,900,000
2,400,000
$15,000,000
14,500,000
7,000,000
7,300,000
5. Cash................................................................................
RevenuesInvestment Income...............................
To record collection of interest.
600,000
6. Cash................................................................................
Investments..............................................................
To record maturity of investments.
7,000,000
189
600,000
7,000,000
Exercise 8-6 (Continued)

7. ExpendituresDebt ServicePrincipal.........................
4,900,000
ExpendituresDebt ServiceInterest...........................
2,160,000
Cash.........................................................................
7,060,000
To record payment of long-term debt principal and interest.
Note that the payment due date is more than a month into the next fiscal year, therefore, the
government does not have the option of accruing that payment at year end.
8. RevenuesInvestment IncomeDecrease in Fair Value
Investments..............................................................
To record decline in fair value of investments.
175,000
175,000
Exercise 8-7
St. Louey Independent School District
Debt Service Fund
Statement of Revenues, Expenditures, and Changes in Fund Balance
For the Year Ended December 31, 20X1
Revenues
Property Taxes
County Appropriation
State Appropriation
Investment Income
ExpendituresDebt Service
Principal
Interest
Excess of Revenues over (under) Expenditures
Other Financing SourceTransfer from General
Fund
Change in Fund Balance
Fund Balance, January 1, 20X1
Fund Balance, December 31, 20X1
$14,981,675
266,084
1,478,157
582,300
19,040,000
14,120,000
190
$17,308,216
33,160,000
(15,851,784)
500,000
(15,351,784)
61,763,591
$46,411,807
SOLUTIONS TO PROBLEMS
Problem 8-1
1. b
2. d
3. b
4. b
5. d
6. d
7. e
8. c
9. d
10. c
Problem 8-2
No.
Date
Accounts
Dr.
1. 6/28/X0
Cash ......................................................................
RevenuesTaxes .................................................
To record receipt of taxes. (Note a)
2. 6/29/X0
Cash ......................................................................
Transfer from Special Revenue Fund ...................
To record transfer received. (Note a)
3. 7/2/X0
ExpendituresInterest on Bonds..........................
Cash ......................................................................
To record semiannual interest payment.
Calculation: (1/2)(.08)($500,000) = $20,000
4. 7/3/X0
Investments ...........................................................
Cash ......................................................................
To record investing available cash.
5. 12/30/X0
Cash ......................................................................
Investments ...........................................................
RevenuesInterest on Investments .....................
To record maturity of investments and
interest received.
191
Cr.
52,000
52,000
38,000
38,000
20,000
20,000
70,000
70,000
73,000
70,000
3,000
Problem 8-2 (continued)

No.
Date
Accounts
6. 1/2/X1
ExpendituresBond Principal .............................
ExpendituresInterest on Bonds .........................................
Cash ......................................................................
To record debt service expenditure.
Calculation:
Bond principal ...............................................
Interest (1/2)(.08)($500,000) ........................
8a.
70,000
Cash ......................................................................
Investments ...........................................................
To liquidate investments.
30,000
ExpendituresBond Principal ..............................................

ExpendituresInterest on Bonds .........................................
Cash ......................................................................
To record final bond principal and interest payment.
50,000
2,000
Calculation:
Bond principal ...............................................
Interest (1/2)(.08)($50,000) ..........................
Cr.
$50,000
20,000
$70,000
7a. 1/2/Y0
7b.
Dr.
50,000
20,000
30,000
52,000
$50,000
2,000
$52,000
Transfer to Special Revenue Fund ........................................

Cash ......................................................................
To transfer remaining assets to Special Revenue Fund.
(Note b)
3,000
8b. 1/3/Y0
Transfer from Special Revenue Fund....................
RevenuesTaxes ..................................................................
Transfer to Special Revenue Fund ........................
ExpendituresBond Principal .............................
ExpendituresInterest on Bonds ........................
To close the operating accounts.
30,000
25,000
3,000
3,000
50,000
2,000
Notes:
a. Alternatively, a correct solution to entries 1 and 2 might first present (or assume) an entry
accruing the taxes receivable and transfer, then record the collection of the receivable.
b.
Net assets at 1/2/Y0 ($30,000 + $25,000 = $55,000) less payment on 1/3/Y0 ($52,000) =
Remaining assets for transfer upon termination of fund ($3,000)
192
Problem 8-3 (a)

Hatcher Village
5-Year Note Debt Service Fund
General Journal
No.
Accounts
Dr.
l. Budgetary Entry
Estimated General Fund Transfer ................................................
Estimated Tax Revenues .............................................................
Appropriations ......................................................................
Unreserved Fund Balance ......................................................
To record budget.
Cr.
10,000
18,000
27,600
400
Calculations:
Appropriations:
Principal, 7/5/X4 and 1/5/X5 ...................................$20,000
Interest, 7/5/X4
(1/2)(.08)($l00,000) ....................................
4,000
Interest, l/5/X5,
(1/2)(.08)($90,000) .....................................
3,600
$27,600
2. Cash .............................................................................................
RevenuesTaxes ..................................................................
To record receipt of taxes. (Note 1)
20,000
20,000
Assumption: All taxes levied were collected.

3. ExpendituresNote Principal .....................................................
ExpendituresInterest on Note ..................................................
Cash
...............................................................................
To record payment of matured note principal and
interest payable.
10,000
4,000
4. Cash .............................................................................................
Transfer from General Fund ..................................................
To record transfer from General Fund.
10,000
5. Cash ........................................................................................6,000
Transfer from Capital Projects Fund .....................................
To record transfer from discontinued Capital
Projects Fund.
193
14,000
10,000
6,000
Problem 8-3 (a) (continued)

No.
Accounts
6. ExpendituresNote Principal .....................................................
ExpendituresInterest on Note ..................................................
Matured Note Principal Payable ............................................
Matured Interest Payable ......................................................
To accrue note principal and interest due 1/5/20X5.
Dr.
10,000
3,600
7a. Transfer from General Fund ........................................................

Transfer from Capital Projects Fund ...........................................
RevenuesTaxes ........................................................................
Estimated General Fund Transfer ..........................................
Estimated Tax Revenues .......................................................
To close revenue- and transfer-related accounts. (Note 2)
10,000
6,000
20,000
7b. Appropriations ............................................................................

ExpendituresNote Principal ...............................................
ExpendituresInterest on Note ............................................
To close expenditure-related accounts.
27,600
Cr.
10,000
3,600
8,000
10,000
18,000
20,000
7,600
Notes:
1.
Alternatively, the tax levy might be recorded at $20,000 or another assumed amount,
followed by a collection entry.
2.
Entry(ies) 7 may be compounded, or any reasonable combination of closing entries may be

made.
194
Problem 8- 3 (a) (continued)

(Not Required)
(2)
(4)
(5)
(/)
Cash
20,000
l4,000 (3)
10,000
6,000
22,000 (/)
36,000
36,000
22,000
Estimated General Fund Transfer

(1)
10,000
10,000 (7a)
Transfer from
Capital Projects Fund
(7a)
10,000
10,000 (4)
16,000
16,000
Other Financing Sources
Transfer from
Capital Projects Fund
(7a)
6,000
6,000 (5)
16,000
16,000
Estimated Tax Revenues

(1)
18,000
18,000 (7a)
(7a)
ExpendituresInterest on Note
(3)
4,000
(6)
3,600
7,600
7,600 (7b)
Unreserved Fund Balance

400 (1)
8,000 (7a)
8,400
RevenuesTaxes
20,000
20,000 (2)
Matured Note Principal Payable

10,000 (6)
195
(7b)
Appropriations
27,600 27,600 (1)
ExpendituresNote Principal
(3)
10,000
(6)
10,000
20,000 20,000 (7b)
Matured Interest Payable

3,600 (6)
Problem 8-3 (b)

Hatcher Village
Debt Service Fund
Balance Sheet
December 31, 20X4
Assets
Cash ...................................................................................................
$22,000
Liabilities and Fund Balance

Liabilities:
Matured note principal payable ...................................................
Matured interest payable .............................................................
$10,000
3,600
Fund Balance (Assigned)....................................................................
$13,600
8,400
$22,000
Hatcher Village
Debt Service Fund
Statement of Revenues Expenditures, and Changes in Fund Balance
Revenues:
Taxes ...........................................................................................
Expenditures:
Note principal ..............................................................................
Interest on note ...........................................................................
$20,000
$20,000
7,600
Excess of Revenues Over (Under) Expenditures...............................

Other Financing Sources:
Transfer from General Fund ........................................................
Transfer from Capital Projects Fund ...........................................
27,600
(7,600)
10,000
6,000
16,000
Net Change in Fund Balance .............................................................
8,400
Fund BalanceJanuary 1, 20X4 .......................................................
Fund BalanceDecember 31, 20X4 .................................................
$ 8,400
196
Problem 8-4
State of Artexva
Advance Refunding Debt Service Fund
General Journal Entries
During 20Y6
1. Cash ........................................................................................8,800,000
ExpendituresBond Issue Costs.................................................
290,000
Other Financing SourcesRefunding Bonds ........................
9,000,000
Other Financing SourcesRefunding Bond Premium...........
90,000
To record issuance of $9,000,000 par 20Y6 6% refunding
serial bonds at 101 less $290,000 issuance costs.
2. Other Financing UsesPayment to Refunded Bond
Escrow Agent ................................................................
Cash .......................................................................................
8,800,000
To record payment of net proceeds of 20Y6 refunding
bond issue to escrow agent to legally defease
$8,000,000 par of 20X2 10% serial bonds.
3. Other Financing SourcesRefunding Bonds ..............................
Other Financing SourcesRefunding Bond Premium.................
Other Financing UsesPayments to Refunded
Bond Escrow Agent .......................................................
8,800,000
ExpendituresBond Issue Costs...........................................
290,000
To record closing the 20Y6 accounts and terminating this
Debt Service Fund.
4. ExpendituresPayment to Refunded Bond
Escrow Agent ................................................................
Other Financing UsesPayment to Refunded
Bond Escrow Agent .......................................................
Cash
...............................................................................
8,800,000
To record payment of net proceeds of 20Y6 refunding bond
issue and of General Fund transfer to escrow agent to legally
defease $8,000,000 par of 20X2 10% serial bonds.
5. ExpendituresInterest on Bonds ...............................................
ExpendituresBond Principal Retirement .................................
Other Financing UsesRetirement of
197
8,800,000
9,000,000
90,000
1,000,000
7,800,000
800,000
200,000
Refunded Bonds ...............................................................

Cash .......................................................................................
8,800,000
To record final payment of interest on, and retirement of
20X2 10% serial bonds.
198
7,800,000
Problem 8-5 (a)

Leslie Independent School District
Debt Service Fund
General Journal
No.
Date
Accounts
(1) 01/02
Estimated Revenues ..............................................
Estimated General Fund Transfer ..................................
Appropriations ......................................................
398,981
Unreserved Fund Balance .....................................
21,019
To record the approved budget.
Revenues Ledger (Estimated Revenues):
Property Taxes ...............................................................
Interest on Investments ..................................................
Dr.
302,000
118,000
250,000
52,000
302,000
Expenditures Ledger (Appropriations):

Serial Bond Principal ......................................................
100,000
Capital Lease Principal
[$38,986 - (.07)($400,000) ..................................
10,986
Interest on Indebtedness
($198,000 + $60,000 + $28,000) .........................
286,000
Fiscal Agent Fees ...........................................................
1,995
398,981
(2) 01/02
Revenues ..............................................................
Accrued Interest Receivable .................................
10,000
10,000
To reverse the 12/31/X4 accrual of interest
receivable. (Note 1)
Revenues Ledger (Revenues):
Interest on Investments ..................................................
(3) 01/02
Matured Interest Payable ......................................
Matured Serial Bonds Payable ..............................................
Accrued Fiscal Agent Fees Payable .......................................
Expenditures .........................................................
152,505
To reverse the 12/31/X4 accrual of bond
principal and interest payable. (Note 2)
199
10,000
101,500
50,000
1,005
Cr.
Expenditures Ledger (Expenditures):

Interest on Indebtedness ........................................................
101,500
Serial Bond Principal .............................................................
50,000
Fiscal Agent Fees ..................................................................
1,005
152,505
200

No.
Date
(4) 01/05
Accounts
Expenditures .........................................................
Cash ......................................................................
Dr.
152,505
152,505
To record semiannual payment of serial
bond debt service. (Note 2)
Interest on Indebtedness.........................................................
(5) 02/12
101,500
50,000
1,005
152,505
Cash ......................................................................
Transfer from General Fund .................................
118,000
118,000
To record receipt of transfer.
(6) 02/12
Investments ...........................................................
Cash ......................................................................
118,000
118,000
To record investment of cash transferred in.
(7)
02/12
(8) 03/24
Restricted fund balance will be increased by the $21,019 required

increase to the Sinking Fund Reserve, which may or may not be
maintained in the accounts.
Expenditures .........................................................
Cash ......................................................................
38,986
38,986
To record annual payment on capital lease.
Capital Lease Principal ..........................................................
Interest on Indebtedness.........................................................
[Interest calculation: (.07)($400,000)] ..................................
201
10,986
28,000
38,986
Cr.

No.
Date
(9) 04/15
Accounts
Cash ......................................................................
Investments ...........................................................
Dr.
7,000
7,000
To record liquidating investments.
Calculation:
Cash required for term bond interest
payment .............................................
Minimum cash balance permitted .......................
Total cash required..............................................
Cash on hand before investment
liquidation ..........................................
Additional cash required ....................................
Investment liquidation (in $000s) .......................
(10)
04/15
$30,000
5,000
$35,000
28,509
$ 6,491
$ 7,000
Expenditures .........................................................
Cash ......................................................................
30,000
30,000
To record semiannual payment of interest
on term bonds.
(11)
05/08
30,000
Cash ......................................................................
Revenues. .............................................................
256,000
256,000
To record receipt of 20X5 property taxes.
Property Taxes ......................................................................
256,000
(12)
07/05
Expenditures .........................................................
Cash ......................................................................
151,000
151,000
To record semiannual serial bond debt
service payment.
50,000
100,000
1,000
151,000
202
Cr.

No.
(13)
Date
10/15
Accounts
Expenditures .........................................................
Cash ......................................................................
Dr.
30,000
30,000
To record semi-annual payment of interest
on term bonds.
(14)
12/31
Cash ......................................................................
Accrued Interest Receivable ..................................................
Revenues ..............................................................
64,000
To record investment earnings for the
year. (Note 1)
30,000
49,000
15,000

Interest on Investments .........................................................
64,000
Calculation:
Interest revenue recorded 12/31..................
Less: Interest revenue reversing entry 1/2 .
Interest revenue for 20X5 (given)................
(15)
12/31
$64,000
10,000
$54,000
Investments ...........................................................
Cash ......................................................................
116,000
116,000
To record investments of cash.
Calculation:
Cash on hand before investment12/31............
Ending cash balance 12/31/X5 (given) ...............
Additional investments made..............................
$129,509
13,509
203
$116,000
Cr.

No.
Date
(16)
12/31
Accounts
Dr.
Expenditures .........................................................
Matured Interest Payable ......................................
Cr.
148,995
98,000
Matured Serial Bonds Payable ..............................
50,000
Accrued Fiscal Agent Fees Payable ......................
To record accrual of semi-annual serial bond
debt service payment due 1/5/X6 to be paid from
existing fund financial resources.
(C1)
(C2)
12/31
995
50,000
98,000
995
148,995
Closing EntriesGeneral Ledger
Appropriations ......................................................................
Estimated Revenues ..............................................
302,000
Estimated General Fund Transfer .........................
118,000
To reverse the budgetary entry.
398,981
21,019
Revenues ..............................................................
Transfer from General Fund ..................................................
Expenditures .........................................................
398,981
Unreserved Fund Balance .....................................
29,019
To close the accounts.
310,000
118,000
Closing EntriesRevenues Ledger

(C)
Property Taxes.......................................................................
Interest on Investments..........................................................
6,000
2,000
8,000
Proof:
Revenues
$310,000
Estimated Revenues ...........................................
302,000
Difference
....................................................$ 8,000
204

Notes:
1.
Alternatively, the interest accrual reversing entry at 1/2 may be omitted and Accrued Interest
Receivable increased $5,000 (from $10,000 to $15,000) in the 12/31/X5 interest earnings
entry.
2.
Alternatively, the debt service payable accrual reversing entry at 1/2 may be omitted and the
liability accounts (rather than Expenditures) may be debited in the 1/5 debt service payment
entry.
Problem 8-5 (b)

Debt Service Fund
Balance Sheet
December 31, 20X5
Assets
Cash ...................................................................................................
13,509
Investments (net of $25,000 unamortized premiums and
$9,000 unamortized discounts) ...................................................
897,000
Accrued interest receivable ...............................................................
15,000
$925,509
Liabilities:
Matured interest payable .............................................................
Matured serial bonds payable ......................................................
Accrued fiscal agent fees payable ................................................
$148,995
Fund Balance:
Restricted for term bond principal ...............................................
Restricted for serial bond service assurance ................................
$ 98,000
50,000
$336,304
350,000
686,304
Assigned ......................................................................................
90,210
776,514
$925,509
205
995
Problem 8-5 (b) (continued)

Debt Service Fund
For Year Ended December 31, 20X5
Revenues:
Property taxes ......................................................................
$256,000
Interest on investments.........................................................
54,000
$310,000
Expenditures:
Serial bond principal .............................................................
Capital lease principal ..........................................................
Interest on indebtedness .......................................................
Fiscal agent fees ...................................................................
398,981
Excess of Revenues Over (Under) Expenditures........................
(88,981)
Transfer from General Fund .................................................
118,000
Net Change in Fund Balance.......................................................
29,019
Fund BalanceJanuary 1 ..........................................................
747,495
Fund BalanceDecember 31 ....................................................
$776,514
206
100,000
10,986
286,000
1,995
Problem 8-5 (b) (Continued)

Debt Service Fund
Subsidiary Ledgers
20X5 Fiscal Year
Revenues Ledger:
Accounts
Property Taxes
Estimated
Dr.
(1)
250,000
Actual
Cr.
(11)
Balance
Cr. (Dr.)
256,000
(C)
Interest on Investment
(1)
50,000
(2)
(14)
(10,000)
64,000
54,000
52,000
Expenditures Ledger:
Accounts
Serial Bond Principal
Estimated
Dr.
(3)
(4)
(12)
(16)
(50,000)
50,000
50,000
50,000
100,000
(8)
10,986
(3)
(4)
(8)
(10)
(12)
(13)
(16)
(101,500)
101,500
28,000
30,000
100,000
30,000
98,000
286,000
(3)
(4)
(12)
(16)
(1,005)
1,005
1,000
995
1,995
Capital Lease Principal

Interest on Indebtedness
Fiscal Agent Fees
Actual
Cr.
52,000
62,000
(2,000)
2,000
Unexpended
Balance
Cr. (Dr.)
(1)
100,000
100,000
50,000
100,000
50,000
(1)
10,986
10,986
(1)
286,000
286,000
387,500
286,000
258,000
228,000
128,000
98,000
(1)
1,995
1,995
3,000
1,995
995
207
(C)
250,000
(6,000)
6,000
Problem 8-5 (b) (continued)

Legend:
1. 01/02
budgetary entry.
2. 01/02
reversal of 12/31/X4 accrual of interest receivable.
3. 01/02
reversal of 12/31/X4 accrual of 1/5/X5 serial bond debt service payment.
4. 01/05
payment of serial bond debt service accrued at 12/31/X4.
5. 02/12
transfer from General Fund.
6. 02/12
investment of cash transferred in.
7. 02/12
increase of reserve to its required level.
8. 03/24
annual capital lease debt service payment.
9 04/15
investment liquidation.
10. 04/15
semiannual payment of interest on term bonds.
11. 05/08
receipt of 20X5 property taxes.
12. 08/05
semiannual serial bond debt service payment.
13. 10/15
semiannual payment of interest on term bonds.
14. 12/15
summary investment earnings entry.
15. 12/15
additional cash investments.
16. 12/15
accrual of 1/5/X6 serial bond debt service payment.
C.
Closing entries (C1, C2, C)
Problem 8-6
Broadus County
Courthouse Bonds Debt Service Fund
Revenues:
Property taxes ...............................................................
Investment income ($80,000 - $5,000) .........................
Total Revenues ............................................................
Expenditures:
Principal retirement...............................................................
Interest .................................................................1,200,000
Fiscal agent fees ...................................................................
Total Expenditures .........................................................
Excess of Revenues Over (Under) Expenditures........................
Transfer from General Fund ..........................................
Net Change in Fund Balance.......................................................
Fund BalanceBeginning of Year ............................................
Fund BalanceEnd of Year ......................................................
$3,065,000
75,000
208
$3,140,000
5,000,000
75,000
6,275,000
(3,135,000)
5,250,000
2,115,000
1,500,000
$3,615,000
Problem 8-7
a.
b.
c.
A crossover refunding differs from a typical advance refunding in that resources in the related
escrow account are dedicated, at least temporarily, to the debt service for both the old debt
and the new refunding debt.
In a typical refunding, neither the assets placed in escrow nor the old refunded debt is
reported on the face of the financial statements. The new refunding debt is reported.
However, in a crossover refunding, both the old refunded debt and new refunding debt is
reported on the face of the financial statements, as are the assets placed in escrow, until the
crossover date.
From a budgetary standpoint, while both the refunded debt and refunding debt is reported on
the face of the financial statements, debt service for both must be included in the budget.
Problem 8-8
Summary reports on this research and analysis problem should be evaluated in terms of the
specific requirements. The depth of analysis and understanding should be apparent
particularly if several reports are evaluated concurrently.
209
CASE SOLUTIONS
Case 8-1
City of Milwaukee
Debt Service Fund
Statement of Revenues, Expenditures, and Change in Fund Balance
(amounts in thousands)
Revenues
Property Taxes
Other Taxes
Investment Income
Other
Expenditures -- Debt Service
Principal
Interest
Bond Issue Costs
$ 52,942
14,695
3,418
8,214
81,206
29,593
750

Other Financing Sources (Uses)
Refunding Bonds
Refunding Bonds Premium
Payment to Refunded Bond Escrow Agent
Transfers In
Fund Balance, January 1, 20X5
Fund Balance, December 31, 20X5
28,112
12,209
(39,571)
31,930
$ 79,269
111,549
(32,280
)
32,680
400
43,807
$ 44,207
210
Case 8-2
a.
1. Accrued Interest Payable..................................................
Cash............................................................................
To record payment of accrued interest.
$332,964
$332,964
2. Cash.................................................................................. 105,396,619
Transfer from General Fund.......................................
105,396,619
To record transfer from the General Fund.
3. ExpendituresDebt ServicePrincipal..........................
ExpendituresDebt ServiceInterest............................
Cash............................................................................
To record payment of principal and interest.
12,878,605
9,776,065
4. Investments......................................................................
Cash............................................................................
To record purchase of investments.
7,300,000
5. ExpendituresDebt ServiceInterest............................
Accrued Interest Payable............................................
To accrue interest on long-term debt.
320,521
22,654,670
7,300,000
211
320,521
Case 8-2 (b)

County of Hawaii
Bond Redemption and Interest Debt Service Fund
Statement of Revenues, Expenditures, and Change in Fund Balance
For the Year Ended June 30, 20X6
Revenues
ExpendituresDebt Service
Principal
Interest
Other Financing SourcesTransfer from General
Fund
Fund Balance, July 1, 20X5
Fund Balance, June 30, 20X6
$
$12,878,605
10,096,586
22,975,191
(22,975,191)
105,396,619
82,421,428
15,041,758
$ 97,463,186
County of Hawaii
Bond Redemption and Interest Debt Service Fund
Balance Sheet
June 30, 20X6
Assets
Cash
Investments
Total Assets
$90,483,707
7,300,000
$97,783,707

Liabilities
Accrued Interest Payable
Fund Balance -- Committed
Total Liabilities and Fund Balance
320,521
97,463,186
$97,783,707
212

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DEBT SERVICE FUNDS

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Other Financing Use...............................................................

Other Financing Use...............................................................

Other Financing Use...............................................................

Other Financing Use...............................................................

3. Other Financing UsesPayment to Refunded

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Exercise 8-6 (Continued)

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Problem 8-2 (continued)

ExpendituresBond Principal ..............................................

Transfer to Special Revenue Fund ........................................

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Problem 8-3 (a)

Assumption: All taxes levied were collected.

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Problem 8-3 (a) (continued)

7a. Transfer from General Fund ........................................................

7b. Appropriations ............................................................................

Entry(ies) 7 may be compounded, or any reasonable combination of closing entries may be

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Problem 8- 3 (a) (continued)

Estimated General Fund Transfer

Estimated Tax Revenues

Unreserved Fund Balance

Matured Note Principal Payable

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Matured Interest Payable

Problem 8-3 (b)

Liabilities and Fund Balance

Fund Balance (Assigned)....................................................................

Excess of Revenues Over (Under) Expenditures...............................

Net Change in Fund Balance .............................................................

Fund BalanceJanuary 1, 20X4 .......................................................

Fund BalanceDecember 31, 20X4 .................................................

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Refunded Bonds ...............................................................

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Problem 8-5 (a)

Expenditures Ledger (Appropriations):

Expenditures Ledger (Expenditures):

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Problem 8-5 (a) (continued)

Restricted fund balance will be increased by the $21,019 required

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Problem 8-5 (a) (continued)

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Problem 8-5 (a) (continued)

Revenues Ledger (Revenues):

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Problem 8-5 (a) (continued)

Closing EntriesGeneral Ledger

Closing EntriesRevenues Ledger

Problem 8-5 (a) (continued)

Problem 8-5 (b)

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Problem 8-5 (b) (continued)